Sun shares drop 11% on weak sales, forecast

JohnShinal

SAN FRANCISCO (MarketWatch) -- Sun Microsystems Inc. shares dropped more than 11% on massive trading volume Wednesday after the hardware giant reported weak sales of computer servers in the just-ended quarter and issued a disappointing forecast for the current period.

The company's stock
SUNW, -0.60%
dropped 67 cents to $5.27 after Sun said fiscal third-quarter sales rose just over 3% to $3.28 billion, less than the $3.42 billion expected by analysts.

More than 320 million shares changed hands, more than five times the stock's daily average.

Chief Financial Officer Michael Lehman forecast on a conference call late Tuesday that revenue for Sun's fiscal fourth quarter would rise between 15% and 18% from the just-reported period. That equates to a range of $3.78 billion to $3.87 billion, less than the $4 billion expected by analysts.

Chief Executive Jonathan Schwartz said on the conference call that the company's sales growth rate was dampened by a poor performance in the U.S. and U.K., especially during the month of March.

The Santa Clara, Calif.-based firm said net income for the three months ended April 1 was $67 million, or 2 cents a share. In the same period last year, the company had a loss of $217 million, or 6 cents a share.

Analysts surveyed by Thomson First Call expected the company to earn a penny a share, including stock option charges.

Schwartz, who took over from company founder and long-time CEO Scott McNealy a year ago, has cut jobs and streamlined its operations. Those moves helped Sun improve its gross margin, or the percent of sales left after deducting product costs, to 44.5% of revenue from 43% a year ago.

Still, the company has been unable to generate double-digit revenue growth as it faces stiff competition in the server market from rivals International Business Machines Corp.
IBM, -1.26%
Hewlett-Packard Co.
HPQ, -1.74%
and Microsoft Corp.
MSFT, -1.70%

Several Wall Street analysts characterized the company's server business during the quarter as weak.

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